Q: Where can we find an investor who is interested in investing in our internet car sales company for a monthly return on their money?
Jan 28 2009
Answered by: Marc Barber Ask a question
Despite the efforts of Evan Davis and his Dragons, many start-up businesses are unaware of the existence of small-scale equity investors, such as business angels or regional venture capital funds, who tend to invest sums of £10,000 to £500,000 and occasionally more. For investment up to £2 million, venture capital trusts are a source of equity finance, while over £2 million a private equity house will be interested, particularly if the sum is much greater.
These investors are providing risk capital, so-called because, unlike debt finance, they have no security and are last in line for repayment if the company becomes insolvent.
Small-scale equity investors will look to realise their investment in three to five years, although the timescales can vary from angel to angel and between venture capital funds.
Business angels are frequently entrepreneurs who have previously started at least one business and made money from it. They seek high-growth business, offering an above-average return on their investment. Many have a preference for specific sectors of the economy. Naturally, the preferred sector or business model is often close to where they made their money previously. As a general rule they invest in businesses within two hours travelling time of their home.
Business angels can invest individually, but frequently belong to angel syndicates whereby the investment goes into a pool, thereby sharing the risks. A majority of angel investments will be under £100,000. There are thought to be between 15,000 and 40,000 angels in the UK.
Venture capitalists (or private equity investors) differ from business angels in that they generally prefer to invest in more established businesses, although a few will consider start-ups. Private equity investors will be looking for a potential return of at least four times on venture or early-stage investing. Specific private equity houses will prefer certain sectors.
Business angels operate in the so-called informal equity market. As mentioned already, there are networks of business angels. Some networks were initially set up by the government because of the vital links angels played in the financing and business development cycle of start-up and early-stage businesses. Since then, commercial networks have appeared, although generally focused on larger deals (£100,000 plus).
The British Business Angels Association (BBAA) is the trade body representing business angels and is a good place to start when looking for business angel networks. Its website has details of member networks in terms of location, specialisation and investment criteria. The British Private Equity and Venture Capital Association (BVCA) has similar details for private equity houses. Local venture capital trusts can be found by a web search or through larger financial intermediaries.
But businesses are just as likely to access business angel finance through business contacts and networking. Some business angels shun formal angel networks, preferring to find and vet their own investments. So angels do sometimes frequent local business events in search of potential investment opportunities.
Some professional firms will also have access to angel/private equity funding. An adviser can help with:
• identifying the most appropriate sources of money
• reviewing the business to identify and correct shortfalls impacing on an investment
• guidance on investor expectations and attitudes
• preparing the business plan and of the live presentation
• Mentoring through the funding and due diligence process.
They will make a charge for the work undertaken – from an introduction fee for contact with an angel, through to a success fee when finance is successfully raised.
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